Consumer prices rose modestly in July, a sign inflation remains in check as the Federal Reserve winds down its bond-buying program.

The price index for personal consumption expenditures–the Fed’s preferred inflation measure–increased 1.6% in July from a year earlier, the Commerce Department said Friday. Excluding volatile food and energy prices, so-called core prices climbed 1.5% year over year.

Both overall and core prices rose at the same annual pace in July as they did in June, suggesting inflation pressures remained at bay. Compared to a month earlier, each measure was up just 0.1%.

The report shows inflation continues to run below the 2% target the Fed sets as a gauge of price stability and healthy growth. The PCE price index has run below 2% for 27 consecutive months.

Still, prices have picked up since the start of the year, and the Fed projects they’ll steadily climb toward its target by the end of 2015. As recently as February, the index showed prices growing at just 1% year over year.

Low inflation gives the Fed more flexibility as it winds down its bond-buying program and plots when and how to raise short-term interest rates, which have been pinned near zero since late 2008. Those policies were designed to spur economic growth by encouraging spending, hiring and investment.

The Fed has been gradually reducing its bond purchases, which totaled as much as $85 billion a month in the latest round of bond-buying, and is set to wind down the program in October.

Fed officials have indicated they’ll raise short-term interest rates next year, assuming the economy grows at the steady pace projected by the central bank. But Fed Chairwoman Janet Yellen has said the Fed may act sooner if economic growth accelerates faster than expected.

A separate measure also shows inflation in check. The Labor Department’s consumer-price index rose 2% in July from a month earlier. In May and June, the index had risen 2.1% year over year.

The CPI historically runs about half a percentage point higher than the PCE price index, which employs different statistical methods.

About Real Time Economics

Real Time Economics offers exclusive news, analysis and commentary on the U.S. and global economy, central bank policy and economics. Send news items, comments and questions to the editors and reporters below or email realtimeeconomics@wsj.com.